REPORT TO THE LEGISLATURE ON INSURANCE VERIFICATION PROGRAM

Transcription

1 REPORT TO THE LEGISLATURE ON INSURANCE VERIFICATION PROGRAM PREPARED BY: THE COMMISSIONER OF PUBLIC SAFETY IN RESPONSE TO MINNESOTA LAWS ST SPECIAL SESSION CHAPTER 6 ARTICLE 3, SECTION 97 NOVEMBER 2006

2 EXECUTIVE SUMMARY People driving without automobile insurance create potential problems for other drivers, insurers, and regulators. All insured drivers must bear the additional risks and costs due to these uninsured motorists. In addition to paying the costs for their own actions, insured drivers also must pay a portion ofthe costs for those who drive without insurance. Minnesota, along with forty-five other states and the District ofcolumbia, has a compulsory insurance law that requires motorists to maintain automobile injury liability insurance. Despite this law, many drivers choose to operate their vehicles without the required insurance coverage. To combat this problem, Minnesota and other states have implemented various insurance verification programs to track compliance with their insurance liability statutes. The rate ofuninsured motorists per state has been tracked by the Insurance Research Council using the ratio between the uninsured motorist claims frequency and the bodily injury liability coverage claim frequency to estimate the likely number ofuninsured drivers at fault in crashes involving at least one injury. Both the national average and the Minnesota average ofuninsured motorists in these studies have decreased slightly since In an effort to reduce Minnesota's uninsured rate, the state implemented a random sample insurance verification program in This program required randomly selected individuals to supply the insurance company and policy number information on all ofthe motor vehicles owned at a time other than their registration renewal period. Previously, owners would report their insurance information as part ofthe vehicle registration process. This information was not verified by Driver and Vehicle Services (DVS), nor was it recorded on the vehicle registration record. The random sample program did not effectively address no fault insurance coverage which led to its suspension and, ultimately, to its repeal. Several other states have implemented insurance verification programs to reduce their uninsured motorist rate. These database programs have been expensive to implement and have not reduced the uninsured motorist rates in those states to a percentage lower than the uninsured motorist rate in Minnesota. Numerous flaws have been reported related to the administration ofthese programs. \ A few state's random sample programs have experienced problems similar to those cited in Minnesota's program review. The uninsured motorist rate in Illinois has actually increased after implementation oftheir program. In Alabama, the rate ofuninsured motorists increased to a rate twice that ofminnesota's after implementation oftheir program. The working group's major finding is that Minnesota's current insurance verification methods are sufficient and cost effective in maintaining a relatively low uninsured motorist rate. 1

3 MANDATORY AUTOMOBILE INSURANCE Minnesota's mandatory automobile insurance law is one ofthe most significarit consumer protection measures required in state statutes. Individuals must carry their insurance cards in their vehicles and must show it upon request to a law enforcement officer. A person's signature on Minnesota's application for vehicle registration is considered affirmation that the vehicle will be insured throughout the registration period. Prior to June 13,2003, an applicant was required to indicate the insurance company name and policy number on any application for renewal ofvehicle registration. This requirement was eliminated by the Legislature in order to facilitate the use ofelectronic measures to renew vehicle registration. Minnesota currently verifies insurance coverage in all ofthe following situations: reportable accidents (90,000 in 2004), no proofofinsurance reports (5,753 in 2004), failure to provide insurance information reports (10,699 in 2004), no insurance convictions (6,317 in 2004) and notifications ofdropped insurance coverage. IfDVS verifies that a driver has no insurance coverage, the individual's driver's license will be suspended or revoked, and the vehicle's license plates will be revoked. Enforcing current motor vehicle insurance laws has reduced Minnesota's UMR to lower than when DVS implemented more intrusive enforcement actions. Using the methods listed above, the number ofindividuals checked for insurance has increased in comparison with the number ofdrivers sampled during DVS' administration ofthe random sample program. Current enforcement procedures target the problem driver rather than the law abiding citizen who simply neglects to respond to an insurance verification check. These methods are also able to directly impact the use of a motor vehicle being driven without insurance, tracking the vehicle being driven at the time of the possible violation. OVERVIEW: INSURANCE VERIFICATION PROGRAM The Minnesota Legislature passed legislation in 2003 mandating the Commissioner of Public Safety to implement a monthly sampling program to verify insurance coverage required under sections 65B41 to 65B.71 (Minnesota Laws 2003, 1 5t Special Session, Chapter 19, Article 2, section 30). The program required the department to sample at least two percent ofall drivers, one-halfofwhom during the previous year had been convicted ofat least one vehicle insurance law violation, had a driver's licensed revoked or suspended due to habitual violation oftraffic laws, had no insurance in effect at the time ofa reportable crash, or had been convicted ofan alcohol-related motor vehicle offense. The program was initiated in March 2004 and operated until its suspension in March The program randomly chose licensed drivers from these two distinct groups oflicense holders. Correspondence was sent listing all ofthe motor vehicles registered in 2

4 Minnesota to each randomly selected individual, requesting that the individual respond within thirty days, listing the insurance coverage on each vehicle or indicating why the vehicle was not required to comply with the terms ofsection 65B.48. The most common reasons for non compliance were that the vehicle had been sold or that the vehicle was not in use at the time ofthe random selection. The responses received by DVS were verified with the named insurance company. The insurance company was required to notify DVS ofany false statements regarding coverage. DVS, on behalfofthe commissioner, was required, without any preliminary hearing, to suspend the drivers' license ofany individual who either falsely claimed coverage, indicated that no coverage was in effect at the time sampled, or failed to respond to the request to furnish proofof Insurance. During the operation ofthe DVS random sample program, 91,346 drivers were sampled with a response rate ofonly 60 per cent. Atotal of37,998 suspension (second) notices were mailed out by DVS. Ultimately, 4,606 individuals had their drivers' license suspended (5 per cent ofthe total sample and 12 per cent ofthose notified). In addition to the low response rate to the requests for insurance verification, DVS received a large volume ofmail returned by the post office. As a result, DVS experienced difficulty in meeting the program's requirement to randomly select the required amount ofproblem drivers, since few problem drivers owned vehicles registered under their own names. DVS received hundreds ofcomplaints. The majority ofwhich could be classified into the following categories: insured license holders who believed they were being singled out and harassed; insured license holders who failed to receive the notification from DVS that they were required to verify insurance coverage because they had failed to update their address and consequently, had their drivers' licenses suspended; insured license holders who had coverage incorrectly denied due to a mismatch on information between DVS and the insurance company; and individuals who did not have insurance and questioned the effectiveness ofthe verification program. In addition, many members of the Legislature were contacted by their constituents about having their driver's licenses suspended, and, as a result, also questioned the program requirements and its effectiveness at reducing the rate ofuninsured motorists. As a result, the 2005 Legislature suspended the insurance verification program (Minnesota Laws 2005, 1 5t Special Session, Chapter 6, Article 3, section 91) and required the Department ofpublic Safety to report to the Legislature on the program's impact on the identification and number ofuninsured motorists in Minnesota and on the viability of any changes in the program's requirements which could lead to a reduction in the number ofuninsured motorists. INSURANCE VERIFICATION WORKING GROUP The Department ofpublic Safety established a working group ofrepresentatives ofthe insurance industry, law enforcement, courts, and state agencies to review the 3

5 effectiveness ofthe random sample program as well as the current motor vehicle insurance requirements in order to recommend any changes to the law or to the program which would improve no fault insurance compliance. This group met three times to review DVS' administration ofthe random sample program, the impact ofother state's insurance verification programs on the rate ofuninsured motorists, and to discuss what, if any, motor vehicle insurance requirements could reduce the number ofminnesota's uninsured motorists. UNINSURED MOTORIST RATE (UMR) IN MINNESOTA According to the Insurance Research Council, the rate ofuninsured motorists in Minnesota has remained fairly constant over the years with its highest rate, 15.8 per cent, in 1993 and its lowest rate, 10.3 per cent in The national average rate ofuninsure_d motorists has moderately increased every year since / Year Minnesota not available National not available Source: Insurance Research Council, Uninsured Motorists 2000 edition and 2006 edition EFFECTIVENESS OF INSURANCE VERIFICAnON PROGRAMS There are three categories ofindividuals that comprise the uninsured motorist population in the United States: 1. Individuals who might comply with insurance laws, ifthey were able to afford to purchase insurance. 2. Individuals able to afford insurance and comply with the insurance laws, but who fail to do so for personal reasons not identified in any ofthe research reviewed by the working group. 4

6 3. Individuals who philosophically object to the principle ofthe no fault insurance law, refusing to purchase insurance regardless ofthe law and who would not easily comply with any insurance verification program. The effectiveness ofany insurance verification program, designed with the intent of lowering the uninsured motorist rate, is contingent upon reducing the numbers of individuals in these three groups. Those who cannot afford insurance, while easily identified in any verification program, would still be unable to comply with insurance laws due to the cost ofobtaining the required coverage. Therefore, any program that targets this population would not be effective in raising the overall compliance rate without a change in the cost ofvehicle insurance.. The working group was unable to identify specific reasons why some uninsured drivers refuse to purchase insurance. Without addressing the specific reasons for noncompliance, no increase in the rate ofinsured motorists within this group ofuninsured motorists will take place. Those who refuse to comply with insurance laws as a matter ofprinciple, regardless of any penalties imposed upon them, also limit the effectiveness ofany insurance verification program established to reduce the uninsured motorist rate. The working group was unable to quantify the number ofindividuals within each group discussed above. Members ofthe working group concluded that those who cannot afford coverage make up the largest number ofuninsured motorists in Minnesota. Therefore, any pj;ogram to increase compliance solely through an insurance verification program would not have a significant impact on the number ofminnesota uninsured motorists. INSURANCE VERIFICATIONS PROGRAMS IN OTHER STATES To combat the problem ofuninsured vehicles, some states have developed databases to verify liability insurance. A database that can match insurance coverage with motor vehicle registration records, coupled with effective enforcement and meaningful penalties, can significantly reduce the number ofuninsured vehicles. Even though its program did not involve enhanced enforcement, Colorado found that verifying liability. insurance through their database reduced the percentage ofuninsured motor vehicles from 33 per cent in 1998 'to 15 percent in Colorado The state ofcolorado implemented the Colorado Motorist Insurance Identification Database Program (MIlDB) on July 1, 1999 to identify insured motorists, assist in the enforcement ofmotor vehicle liability insurance requirements, and to provide law enforcement officials, the Motor Vehicle Division and other state entities with an on-line tool to assist in the identification ofinsured motorists. A private vendor maintains the Colorado database ofregistered vehicles and liability insurance. The goal ofthe MIIDB system is to reduce the number ofuninsured motor vehicles operating in Colorado. In the 5

7 same studies referenced earlier related to UMR statistics, Colorado had an average uninsured rate of33.4 per cent from followed by a drop to 29.2 per centin 2002,21.6 per cent in 2003 and by 2004, a drop to 15.0 per cent. MIIDBcreated a database ofall insured vehicles and operators, all Colorado licensed motor vehicle operators, and all Colorado registered vehicles. The system performs a matching routine to compare the insured data with the registered data. Any owner ofany vehicle that has not been identified as insured for 60 consecutive days is sent a notification letter providing the owner with specific actions required to rectify the insurance status. The Colorado legislature appropriated $3,374,500 in the first year to create this database and imposes a 50 cent per year surcharge on all motor vehicle registration renewals to fund the ongoing operations ofthis program. It should also be noted that Colorado addressed the concerns ofthe first grouping of uninsured motorists (those who cannot afford insurance coverage). Colorado was a nofault state up until July 1, Under Colorado's no-fault law, an injured party was required to have medical costs exceeding a $2500 tort threshold before a bodily injury (BI) claim could be filed against an insured driver, but uninsured motorists (UM) claims had no such threshold..on July 1, 2003, the state ofcolorado became a tort state, repealing its no-fault system and reducing the tort threshold. These changes were significant factors in lowering the price ofinsurance to Colorado residents and, therefore, lowering the rate ofuninsured motorists. While it may appear that a significant drop in the uninsured motorist rate occurred between in Colorado, the original rate ofnoncompliance in Colorado between was inflated due to the UM:BI issue described above. With no difference in claim filing thresholds, Colorado's UM to BI claim frequency ratio was 15 percent as was always suspected. And so, while the uninsured motorist rate has deceased somewhat in Colorado, the rate ofnoncompliance is still 50 per cent higher than the rate currently in Minnesota. The decrease in noncompliance cannot be attributed solely to Colorado's insurance verification program, but rather to a combination ofthe verification program and the switch to a tort system from a no-fault system. In addition, Colorado has recently decided to bring their insurance verification program "in-house" after experiencing some problems with its private vendor. Colorado officials determined that the vendor had listed certain vehicles as "commercial" vehicles and thus as "insured" when, in fact, the vehicles in question were neither "commercial" nor "insured". This discrepancy resulted in a lower rate ofinsured motorists in Colorado being reported than was actually the case. Georgia The state ofgeorgia implemented the Georgia Electronic Insurance Compliance System (GEICS) on October 8,2003. Insurers issuing motor vehicle liability insurance policies in 6

8 Georgia are required to electronically report insurance infonnation to the Department of Revenue's (DOR) insurance database within 30 days ofthe date insurance coverage begins. Tenninations, additions, or deletions ofvehicles from existing policies must also be reported. The GEICS database is cross-referenced with the vehicle identification number (VIN) on the DOR tag and the title database, called GRATIS. Ifa match is found, a valid insurance coverage indicator is placed on the vehicle's record. Ifno match is found, the vehicle owner will be unable to register and purchase Georgia license plate registration. Law enforcement and County Tax Commissioner personnel have access to GRATIS in order to check the insurance status ofany vehicle registered. According to the Insurance Research Council, Georgia's uninsured motorist rate (UMR) prior to the implementationof GEICS (between 1989 and 1997) was estimated to be 15 per cent In 2004 after the implementation ofgeics, Georgia's UMR was reduced to 9.6 per cent The state oftexas is currently debating whether they could reduce the number of uninsured drivers by creating a database to identify uninsured vehicles and cancel the vehicle registrations iftheir owners do not obtain and maintain insurance coverage. Texas estimates that approximately 20 per cent ofall motorists in Texas drive without insurance. The Insurance Research Council report lists Texas with an average 19.7 per cent uninsured motorist rate from and dropping to 16.5 per cent in Texas is also investigating the factors that detennine automobile insurance rates with a view ofmaking insurance more affordable. The state oftexas estimates that the annual cost to operate an insurance database which matches insurance coverage with motor vehicle registration records and includes costs for effective enforcement using meaningful penalties, would be as follows: Year Database Operations Second Letter Mailings Publicity Total Annual Cost $6,449,040 $6,602,400 $1,080,000 $1,080,000 $150,000 $150,000 $7,679,040 $7,832,400 Texas also estimates that the state would collect a reinstatement penalty of$250 on each vehicle for cancellation ofregistration for failure to provide proofofinsurance. Revenue estimates were as follows: Year First Letters Warning ofpossible Cancellation and Reinstatement Penalties Mailed Vehicles Reinstated and Number ofpenalties Collected Deposited in General Revenue from Penalties ,000 72,000 $18,000, ,000 72,000 $18,000,000 The state analysis assumes that the volume ofmail would increase as the program gets underway, but, after two years ofoperation, the mail volume may decline with the decline in the number ofuninsured motor vehicles. 7

9 Alabama The state ofalabama does not have a database system to verify insurance coverage. Instead, the state has used a random sample system beginning in 2001 similar to the program that was previously administered here in Minnesota. Insurance questionnaires are sent to randomly selected owners while previously identified problem drivers must be included in the random sample selection for three years after the violation or period ofno insurance. Alabama selects approximately 4/1 0 of 1 percent of registered vehicles per month. The owner(s) must then submit their response via a web site administered by a private vendor. Ifthe owner does not have insurance on the verification date, the owner does not respond within 30 days, or the insurance company denies issuing the policy, Alabama initiates steps to suspend the license plate registration unlike the drivers' license suspensions that were mandated in Minnesota. To combat the problem ofincorrect addresses on the state's motor vehicle database, Alabama adds a notation to the vehicle's records ifa survey letter is returned to the state as undeliverable. The county license bureau must then obtain a new address at the next registration cycle, and the survey is sent again to the vehicle owner at that time to prevent individuals from supplying incorrect addresses in order to avoid receiving and/or replying to a survey. No action is taken against the vehicle's registration based solely on undeliverable mail. Alabama's rate ofuninsured motorists from averaged 27.5 per cent. In the first year ofits random sample program, the uninsured motorists' rate dropped to 21.5 per cent; the rate has risen in subsequent years and in 2004 rate was at 24.8 per cent. In comparison with Minnesota's uninsured motorist rate, Alabama has steadily maintained a rate double that ofminnesota. Illinois Illinois, like Minnesota, stipulates that an individual's signature on the vehicle registration application affirms that the vehicle in question will be insured throughout the registration period. Illinois uses a random sample program to verify compliance with its mandatory automobile liability insurance law. Under the Illinois program, 5,000 to 8,000 vehicles are randomly selected per week, and the owners are sent an insurance verification form that must be completed and returned within 30 days. The vehicles are pulled from the general pool ofall vehicles registered in Illinois and from smaller special pools ofvehicles that have previously been identified as uninsured. The Illinois program differs from the suspended Minnesota random sample program in that it selects vehicles rather than drivers. For example, an Illinois resident could own five vehicles, and only one vehicle maybe selected for any particular sample. 8

10 Once sampled, the vehicle owner must respond by mail or fax; Illinois' system does not permit electronic responses over the internet. All responses are manually entered into a spreadsheet by the vehicle identification number, NAIC insurance company code, and the given policy number. The approximately 800 insurance companies licensed to do business in Illinois are broken down into four groups; once a month, each group receives the spreadsheet ofresponses for their companies to verify. Most are sent by mail, with only 12 companies receiving electronic requests. Once the insurance company has verified the list, it is returned; the results are manually entered int<;> the Illinois record base. Illinois sends letters to all vehicle owners who fail to respond, have insurance coverage denied, or who responded that they had no insurance on the given date. The vehicle's license plates are suspended until insurance is obtained arid a$100 reinstatement fee is paid. Like Alabama, Illinois takes action against the vehicle rather than the vehicle owner as was the case here in Minnesota. To compliment the plate suspension requirement, Illinois has a minimum $1,000 fine for driving a vehicle with suspended license plates from a previous insurance violation. Illinois allows vehicles in the random sample pool to be reported as "not in use" but will place a notation on the vehicle record to place the vehicle in the short pool ofsample participants within days after the vehicle has been registered to prevent individuals from attempting to avoid the sample process by claiming non-use. The random sample program in Minnesota did not track non-use responses. Illinois had an average rate of 12.1per cent uninsured motorists between ; the rate has been consistently higher under the random sample program, 16 per cent in 1999, 16.4 per cent in 2000, 16.8 per cent in 2001, 16.2 per cent in 2002 and 2003, and 16.1 per cent in

11 CONCLUSION The information reviewed by the Insurance Verification Working Group does not prove that administering an insurance verification program to target a relatively small number ofuninsured motorists (i.e., those who can afford insurance, but for unknown reasons do not obtain insurance) would be cost effective and reduce the current rate ofuninsured motorists in Minnesota. The sixteen states administering insurance verification systems (other than Pennsylvania) have higher uninsured motorists claim rates and/or bodily injury claim rates than Minnesota, according to the 2006 report prepared by the Insurance Research Council. RECOMMENDATIONS Based on the working group's findings, the Department ofpublic Safety recommends to the Legislature that the Division ofdriver and Vehicle Services continue its administration and enforcement ofminnesota's motor vehicle insurance laws. Current procedures have resulted in decreasing Minnesota's rate ofuninsured motorists. The Department's review ofother state insurance verification programs does not provide evidence that creating an expensive verification program will result in the lowering ofa state's uninsured motorist rate. 10